HAS GOLD LOST ITS LUSTRE?
Alan McIntosh, Chief Investment Strategist at Quilter-Cheviot
Equity markets rose last week, continuing the strong rally seen since the sharp falls of late February and March. Global indices are within a few percentage points of highs reached in mid- February, with the US a whisker away from matching its all-time high. Many technology names have seen their share prices rise strongly as they benefit from lockdowns and people working from home. Meanwhile, tourism and leisure names struggle with few customers. Noticeably lagging has been the UK market, with heavier exposures to oil and banks, large sectors that have been especially hard hit by the economic downturn. The loss of cash dividends has also been pronounced in the UK.
Gold lost a bit of its lustre last week, closing down over 4% after a sharp fall on Tuesday. Having just punched through $2,000 per ounce and reaching a record high nominal price, a rise in bond yields took some of the glitter away. Falling bond yields, especially into negative real yield territory, have been one of the main supports for the bullion price, so it shouldn’t be surprising to see profit taking on any recovery in yields. With central banks still buying bonds however, it seems unlikely that yields will move sharply higher in the short-term.
The rise we have seen in equity markets has largely been driven by huge amounts of liquidity provided by central banks. However, recent economic data points to a strong recovery in many of the global economic indicators, as lockdown restrictions have been eased in many countries. There is still a risk that opening up an economy too soon leads to a new wave of Covid-19 cases, as we have seen in some US states. Further progress in markets will depend on getting that balance right.